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Does a shrinking and ageing population lead to lower welfare?

By Stephan Sievert and Reiner Klingholz

 

Complete German Version

 

The ageing and the shrinking of the population are leading to a significant decline in the size of the workforce in Germany. By 2050 the number of people of working-age will have declined from 53.3 to 38.6 million. The share of those who are economically dependent – children and pensioners – is set to rise dramatically over the same time horizon. This means that the material welfare of our society will have to be generated by an ever-smaller share of our population and that it is destined to sink if the performance of every working person will remain unchanged.

However, is this a realistic scenario? In the past three and a half decades the hours worked in Germany have already stagnated, yet the economy has continued to grow – solely based on productivity increases. The latter could certainly continue to drive economic growth, but are themselves not immune to demographic changes. The ageing of society is likely to reduce the capital stock of the employed over the medium-term and could possibly have a negative impact on total factor productivity – a measure of how efficient the two production factors labour and capital are used – too, if necessary political reforms are not carried out. Total factor productivity would go down if older workers were less productive than younger ones, something a number of studies hint at. However, only time can tell if this will also hold true in the future. What is clear is that, all other things equal, demographic change exerts a dampening effect on economic growth. This is not to say, however, that the size of the economy will necessarily shrink in a shrinking society.


Yet, are economic power and welfare actually the same thing? Criticism about the role of GDP as welfare indicator is not new and well-known. Numerous indices have been developed to reflect the actual size of the economy more realistically than GDP and to also include non-material factors in the calculation of societal welfare. Still, a generally accepted definition of what welfare really is is still not on the horizon.

Welfare thus seems to have a strong subjective component to it. This is reflected in the growing body of literature on subjective well-being, life satisfaction and happiness. The results of this research can provide valuable insights into the human psyche and help us establish a broader definition of well-being despite the fact that the highest average happiness level may not be an adequate policy goal for a variety of reasons. For instance, life satisfaction is indeed positively affected by a higher income. However, most researchers find decreasing marginal returns to income, which means that every Euro you earn will give you (and thus the whole society) less additional happiness than the previous one. What is more, subjective well-being is heavily influenced by non-monetary factors such as education, health, social relations and above all the employment status. The loss of a job results in higher long-term happiness declines than every other single event, including separation and divorce. This can be explained by the fact that employment not only yields material returns but also non-material ones in terms of societal recognition. For the same reason, unemployment often leads to a loss of self-esteem, fear and depression.


Demographic change has a direct or indirect effect on many of the determinants of subjective well-being. In times of scarcity of potential workers, the qualifications of every single person will gain in importance. In order to avoid unemployment, additional efforts have to be undertaken in the educational sector, as demand for the low-qualified and increasingly also for the medium-qualified is sinking. Important in this respect: Education is not just a means to reach economic goals but also a factor that positively influences life satisfaction.


Another factor of growing importance is public health. Physical fitness is a pre-condition for high productivity among elderly workers. Already today, many enterprises actively promote employee health and thus ensure not only economic success but also higher levels of subjective well-being. As long as they stay healthy, elderly people actually report higher levels of happiness than middle-aged ones.

One has to bear in mind, though, that people would not be happier if the economy stagnated or even shrank. On the contrary, existing battles over income distribution would heat up. Still, creating an economic dynamic that combines high levels of employment with high levels of subjective well-being is not impossible even under conditions of rapid demographic changes. In order to minimise the growth-dampening effect of population ageing, we should be interested in keeping people productive as long as possible. A further increase in the retirement age seems logical – especially against the background of recent increases in life expectancy. Moreover, the structural change towards a knowledge-driven economy enables us to reconcile work  and other aims in life – by way of flexible hours and workplace arrangements.

 

 

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